With large multilateral trade deals under the World Trade Organization having ground to a halt over the past decade, countries have turned to regional or preferential free trade agreements among smaller numbers of participants to inch liberalisation ahead.
The leader in this process has been the EU, concluding multifaceted deals with developed and developing countries since 2005. Its latest success was a series of agreements with Singapore signed last month.
However, the world has become increasingly hostile to even small-scale trade deals in recent years. US president Donald Trump has shown a willingness to use trade as a weapon, and ambitious regional agreements such as the Transatlantic Trade and Investment Partnership have fallen by the wayside. Indeed, the underlying benefits of trade have been disputed by policymakers, and neo-mercantilist arguments are on the rise, putting even the EU’s march towards trade deals in doubt.
Fighting back against the neo-mercantilists is no easy task, but there is some ammunition available. The results of a recent large-scale study, which I helped prepare together with researchers from CASE-Center for Social and Economic Research for the European Parliament, show that there is no doubt about the benefits of trade to the EU and to developing countries.
In an examination of recent trade agreements that the EU has concluded with Peru and Colombia, South Korea and six nations of Central America, we find that in no case did an FTA with the EU have a demonstrably negative effect on the welfare of either the EU or the signatory country.
In most cases, given the disparity of size between the EU and its trade partners, the partner countries saw much more significant aggregate gains (as a percentage change from baseline) than the EU, which saw more modest changes. This does not mean that the EU did not gain, merely that the EU’s partners have a larger percentage gain, showing that trade is a win-win.
Although aggregate effects for the EU across its FTAs have been small relative to the size of the EU economy, sectoral effects have been quite impressive for both the EU and its partners, especially in areas where disaster was predicted.
The example of the European automotive sector under the EU-South Korea FTA is instructive. EU companies have increased their exports to South Korea at the same time that imports into the EU have increased rapidly. Importantly, the differentiation of EU brands and their levels of quality, as well as evolving consumer tastes in South Korea, have allowed the European automotive industry to thrive even under increased competition.
This lesson will probably apply to the forthcoming EU-Vietnam FTA, where it has been predicted that EU leather producers will lose out to Vietnamese competitors. Given the quality differences between (for example) Italian high-end leather and relatively lower-quality Vietnamese goods, it is likely that trade in leather goods may actually increase.
In fact, the only dark cloud in our analysis is that the benefits of FTAs appear not to have been as great as predicted by esoteric econometric models constructed before agreements take effect. However, as we note in the study, this is not because trade fails to deliver, nor is it due to the nature of the models themselves. In reality, it is because policymakers do not deliver on the full liberalisation that the models assume.
Put another way, there is an assumption by economists that when politicians talk about “free” trade, they actually mean “free”. Economists then model agreements under a scenario of full liberalisation. However, there is often a watering-down of liberalisation during FTA talks, and barriers that remain up, meaning some of the gains of trade are left on the table.
Finally, and not unexpectedly, the benefits of trade agreements appear to stop at trade and its associated economic outcomes (growth, employment, sectoral effects).
A key component of the EU’s approach to FTAs has been to include human, environmental and labour rights clauses as a form of soft conditionality. Our analysis shows that, here, the EU has been less successful in creating movement. While environmental protection has improved somewhat in each country concluding an agreement, the timeframe is too short to see the potential long-term effects of increased resource use and sectoral reallocation.
With regard to human rights and/or labour protections, the evidence is even thinner, suggesting that FTAs do little to influence domestic policy in these areas. Indeed, the key takeaway from the EU’s existing agreements is that trade agreements are very effective at influencing sectoral trade flows in the short run but relatively less effective at changing social metrics. This is not to say that the EU should abandon its stance in favour of human rights, but rather that trade agreements may not be the best forum.
Given the evidence of the benefits of trade, the way forward for the EU is clear. Forthcoming agreements with Indonesia, Mercosur and Mexico must reach for maximum liberalisation, especially in the area of non-tariff barriers. In building support for these FTAs, EU policymakers should stress that trade brings demonstrable benefits, although the gains will be small within the EU, so it is also important not to oversell what FTAs can do.
Finally, it may be easier politically to keep a narrow focus on trade-related matters rather than reaching for human rights and labour protection within the confines of an FTA (while not abandoning the championing of human rights). In this sense, the EU is rather limited in its direct influence, and concentrating on the benefits of free trade may have the impact that the EU desires over the long term.
Christopher A Hartwell is professor of financial systems resilience at Bournemouth University, professor of international management at Kozminski University in Poland, and fellow and former president of CASE-Center for Social and Economic Research.
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